This being an election year, the Budget proposed by the Government had no new taxation provisions. Thus, the Income-tax Act that had been amended beyond recognition in the last sixty-three years, escaped some bruises for the present. In a welcome change, the inevitable post-Budget analysis on myriad TV channels, sometimes focussed on more substantial issues, showing that taxpayers are curious to know the basis on which they are taxed and whether the present tax system is fair to the honest taxpayer, and how well his concerns have been handled by the tax administration.

While posts on WhatsApp would have us believe that taxpayers, who are allegedly in a minuscule minority, are a muchharassed lot, the Government pushes a diametrically opposite narrative viz. Indians are significantly undertaxed. Both views need correction. According to the latest Oxfam report “Survival of the Richest: The India Story,” a little less than two-thirds (64.3 per cent) of the total GST is paid by the bottom 50 percent of the population, one-third of the GST is collected from the middle 40 per cent and only 3-4 percent from the richest 10 per cent of the country, half of whom also pay income-tax, and propagate the narrative of besieged taxpayers. The other view is equally faulty. After presentation of the interim budget, in a press interview, the Revenue Secretary (RS) stated that tax to GDP ratio had touched 11.6 per cent in FY 2023-24 and was poised to reach an all-time high of 11.7 per cent next year. It would appear that taking a decidedly narrow view, the RS had considered only taxes levied by the Centre, i.e., Income-tax, GST and Central Excise, for working out the taxto-GDP ratio. However, if we take taxes levied by States into account, tax-to-GDP ratio touches 17.7 per cent. To illustrate, as on 31 March 2023, India’s nominal GDP was Rs.273 lakh crore, and tax receipts totalled Rs.48.4 lakh crore, (Central tax revenue of Rs.30.4 lakh crore plus States’ own tax revenue of Rs.18 lakh crore) giving a tax to GDP ratio of 17.7 per cent, which is more compatible with the World Bank’s study of developing economies, according to which tax revenues above 15 per cent of a country’s GDP are necessary for economic growth and poverty reduction.

Tax revenues above this level ensure that a country has the necessary funds to invest in public infrastructure and achieve sustainable economic growth. Thus, it can safely be said that our taxation level is sufficient to sustain our growth as also the Government’s infrastructure and welfare expenses. However, we have yet to reach the level of developed countries, for example, the average tax-toGDP ratio of members of the Organisation for Economic Cooperation and Development (OECD) was 34.1 per cent in 2021.

Making the tax system more equitable, even as it yields the required revenue, using taxation provisions judiciously to increase production and employment while keeping inflation under control, is a multifaceted challenge for the Government. According to Revised Estimates for Financial Year 2023-24, Direct Tax collections are pegged at Rs 19.13 lakh crore while Indirect Tax collections (GST ) would probably reach Rs.20.04 lakh crore.

The current trend of the regressive Indirect Taxes (both GST and non-GST) collections, which are paid disproportionately by the poor, exceeding the progressive Direct Taxes (Income-tax and Corporate-tax) collections, which are paid by the rich, shows a certain degree of inequity in the taxation system, which should be remedied. Interestingly, India has the second-highest GST rate among 115 countries studied by the World Bank. GST is levied in five different tax slabs: 0; 5; 12; 18, and 28 per cent.

Additionally, there is a special rate of 0.25 per cent for rough precious and semi-precious stones and 3 per cent on gold. A cess of 22 per cent on top of 28 per cent GST, is levied on items like aerated drinks, luxury cars and tobacco products. Most countries have a single rate of GST: 49 countries use a single rate, 28 use two rates, and only five countries viz. India, Italy, Luxembourg, Pakistan and Ghana use four rates. Multiple tax rates force businesses to classify inputs and outputs based on the applicable tax rate. Further, to claim input tax credit, a firm requires to match invoices between outputs and inputs, which increases the compliance burden.

Also, working capital gets locked up, due to slow refund processing and complicated administrative processes, which often lead to frauds. Sometimes, States levy new taxes in addition to GST e.g., Tamil Nadu started levying an entertainment tax in addition to 28 per cent GST and Maharashtra increased motor vehicles tax to compensate for losses due to GST. The World Bank’s India Development Update, 2018 called India’s GST too complex. Simplification of processes, moving towards one slab of taxation and most importantly, reduction in rates, are required to reform GST. A similar disturbing trend has emerged in Income-tax collections, with Personal Income-tax collection exceeding Corporate Tax collections, year after year, which would imply that individuals and small businesses are bearing the tax burden more than big businesses.

One of the reasons for this anomaly is: individuals are taxed at 30 per cent (on income exceeding Rs.15 lakh) and firms are taxed at 30 per cent on all income, while manufacturing companies are taxed at 15 per cent and except the largest, all non-manufacturing companies are taxed at 22 per cent. Given the requirement of numerous statutory compliances for corporates, smaller businesses are generally organised as firms, so a higher taxation rate for firms disincentivizes small businesses, which are generally labour intensive. Therefore, to promote small businesses and generate employment, tax rates for firms should be brought on par with those of corporates.

The cost to the exchequer would not be high; Income-tax Departmental statistics for the assessment year 2018-19 (the last year for which such statistics are available), show that the aggregate tax liability for 12,69,736 firms was Rs.42,993 crore while aggregate tax liability for 8,41,942 companies was Rs.4,31,041 crore. Thus, halving the tax rate for firms would result in an outgo of less than Rs.20,000 crore, which could be made up in due course from the increased income of firms. Equity also dictates that after the tax write down of Rs.1,45,000 crore for corporates, smaller businesses should also be given some relief. The legendary investor, Warren Buffet, found that while he was paying taxes at 18 per cent, his secretary was being taxed at 35 per cent. Probably, high rates of personal taxation combined with low tax rates for companies incentivizes tax evasion with owners declaring higher corporate income and availing various doubtful exemptions on personal income.

Making the tax system more productive, by levying taxes on wealth and inheritance, is another doable option before the Government. Honest taxpayers feel threatened by daily reports of massive tax evasion rackets, seizure of humongous amounts of unaccounted cash, well-organised gangs of GST evaders etc.

They rightly feel that while the tax departments take away more than half of their hard-earned money, there are others who do not pay any tax at all. Some amount of leakage in tax revenues is inevitable but complete computerisation of the Income-tax Department and developing GST on a digital platform has made large-scale evasion difficult. An overview of direct tax collections over the years shows that direct tax collections crossed Rs.1 lakh crore for the first time in FY 2003-04. A nineteen-fold increase in nineteen years testifies to the success of the various measures taken by the Income-tax Department.

A similar trend manifests itself in GST, which has seen monthly collections doubling from an average of Rs.0.85 lakh crore in FY 2017-18 to approximately Rs.1.67 lakh crore per month in FY 2023-24. So far, adoption of ersatz solutions for deep-rooted structural problems has been the bane of the Indian tax system; instead of treating the tax departments as milch cows and raising revenue quickly by imposing high rates of VAT and GST, a rationalisation and re-imagination of the entire tax system, and budget making is required.

Great Britain, from where we inherited our tax system, has integrated Direct Taxes (Inland Revenue) and Indirect Taxes (Customs and Excise) under Her Majesty’s Revenue and Customs Board (HMRC) in 2005, and the IRS Code 1986 of the US incorporates both Direct and Indirect Taxes, while Indian tax authorities still aim at seamless co-ordination between CBDT and CBIC. Perhaps, what President Reagan said for the US tax system, applies squarely to us: “The problem is not that the people are taxed too little. The problem is that Government spends too much.”

(The writer is a retired Principal Chief Commissioner of Income-Tax)